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Growth and Inequality

Paolo Sospiro Dipartimento degli Studi sullo Sviluppo Economico Facoltà di Scienze Politiche Università di Macerata paolo.sospiro@unimc.it. Growth and Inequality. Macerata 2 March 2012 Development Economics University of Macerata. Two important questions on inequality.

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Growth and Inequality

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  1. Paolo Sospiro Dipartimento degli Studi sullo Sviluppo Economico Facoltà di Scienze Politiche Università di Macerata paolo.sospiro@unimc.it Growth and Inequality Macerata 2 March 2012 Development Economics University of Macerata

  2. Two important questions on inequality • The philosophicalquestionis: • Isit fair? • The Intrinsicaspect of inequality • The economicalquestionis: • The functionalaspect of inequality (income and wealth) • Isitgood for growth?

  3. Inequality of what? • Functional; • personal; Income; Wealth (assets); Lifetime income.

  4. Functional aspect of inequality

  5. Four criterias Anonimity principle (from an ethical point of view); Population principle (size does not matter but proportions matter); Relative income principle (no matter about absolute values); Dalton principle (regressive transfer

  6. Lorenz Curve

  7. Dalton criteria

  8. Dalton & Lorenz

  9. Different Lorenz Curve

  10. Brazil and Mexico

  11. Egypt & India

  12. Kenya & Uganda

  13. OECD countries

  14. How to measure inequality1? • Consider is distinct incomes, and in each income class j , the number of individuals earning that income is denoted by • , thus the total number of people n is simply equal to • The mean of any income distribution is simply average income given by

  15. How to measure inequality2? • This value is given by the difference in the incomes of the richest and the poorest individuals, divided by the mean to express it independently of the units in which income is measured • The range • This approach doesn’t satify the Dalton principle. The Kuznets ratios is one of them.

  16. How to measure inequality3? • Inequality is proportional to distance from the mean income. Therefore, this approach take all income distancesfrom the average income, add them up, and divide by total income to express the average deviation as a fraction of total income • The mean absolute deviation • Doesn’t satify Dalton principle

  17. How to measure inequality4? • The coefficient variation satify all four principle and so it is Lorenz-Consistent. • The main property of this approach is that give more weight to larger deviations from the mean.

  18. How to measure inequality5? • The Gini coefficient satify as well as all four principle and so it is Lorenz-Consistent. It takes the difference between all parirs of incomes and simply totals the (absolute) differences. • It’s normalized by dividing by population squared (n) as well as income (y). • Before we sum ks, holding each j costant, and then sum over all the js. • It’s precisely the ratio of the area between the Lorenz curve and the 45° line of perfect equality.

  19. Inverted-U Hypothesis

  20. U-Inverted Hypothesis Picture

  21. Marginal Savings rate 1 Savings Savings 5000 30000 55000 Income 5000 30000 55000 Income a) Increasing Marginal Savings Rate b) Decreasing Marginal Savings Rate

  22. Marginal saving rates 2 Savings Income

  23. Desired standards of living, Income and Saving rates Savings rates Self-sustaining low-income trap Rich Middle Class Poor Shortfall (Desired Standards of living /Income)

  24. Demand Composition Picture difference between level and Pattern of Consumption Personal Distribution of Income Poor (x%) Middle Class (y%) Rich (z%) Food Se r v. Hous I ng Hous I ng Food Se r v. Hous I ng I CT Food Se r v. I CT I CT DemandComposition AveragedbyDistribution of Income Se r v. Hous I ng Food I CT FunctionalDistribution of Income (DemandComposition for DifferentInputs) capital Land Uns k S k New Personal Distribution of Income

  25. The problem of collateral

  26. The problem of collateral 2

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